China – Feature
here are likely to be industry specific, most likely impacting on the technology and financial services sectors,” Bourke says. “Valuations in China remain attractive outside of these sectors and markets have already factored in a lot of uncertainty,” he adds.
Andrew Swan, head of Asia equities at Man GLG, agrees that there is much to be positive about China from an investor per- spective, especially in keeping an eye on one important ele- ment: earnings revisions. “While re-opening and resurgent policy support in China, lower inflation and a better growth environment support the region’s narrative in relative terms, we remain focused on our key driver, earnings revisions – in our view the key driver of equity prices and, therefore, alpha – which are well below long-term averages, and are starting to trend up,” he says.
These do reveal attractive opportunities in key areas, Swan says, giving support to the investor case for sectors such as healthcare, telecoms and consumer discretionary. And these should be good for investors, irrespective of macro movements.
Investor movement Some investors may well wish to cut and run, like the afore- mentioned pension funds. And the extent to which investors choose to de-risk from China will be a function of risk appetite and investment horizon, says Bourke. However, he warns: “With valuations at generational lows, reducing exposure now may come at a high opportunity cost.”
The trend suggests that the opposite is happening, with inves- tors showing a willingness to engage in the country. The Hong
Kong Stock Connect programme, where Shanghai and Shenz- hen-listed equities can be traded, has seen investors flock to the investment opportunities on offer. More than $3.8bn (£3.2bn) flooded into stocks in one week, according to The Financial Times. This could be the start of a longer-term trend. Alternatively, it could, as some have sug- gested, be “speculative” investments from hedge funds. This investor boost comes on the back of BNP Paribas get- ting the green light to launch an asset management venture with Agricultural Bank of China. Due to regulations, foreign banks and asset managers usually use investment models such as joint ventures with domestic banks to undertake business in China.
It does provide a further indication of how investors are seeing long-term prospects in China. Blackrock and Amundi already have such operations in the country.
Power and control
Another major reason why China might see a turnaround is down to political influence. The Chinese government controls the central tenets of the financial system, composed of the central bank, the People’s Bank of China and four big state- owned banks. With this control, the government can tell state-owned asset managers and pension funds to buy shares and bonds to main- tain prices and boost companies. Something the UK govern- ment must be envious of.
In addition, the Chinese government can give a nod to the state’s asset companies to buy bad debt from commercial banks – which shunts debt around the system and ultimately making it disappear.
With valuations at generational lows, reducing exposure now may come at
a high opportunity cost. Michael Bourke, M&G
Investment opportunities So given this control, a full-blown financial crisis is unlikely. Although history teaches us that such complex all-pertaining bureaucracies are not insurmountable forever. Balancing the negatives and positives, all this adds up to China being a strong investment, despite indications to the contrary. But there has been a shift. Even if China is a better investment proposition than first appears, the crisis is not an illusion. It is safe, therefore, to conclude that China may not be able to regain the prestige position it once held. Investment returns on the level of Chinese growth are a once in a generation phe- nomenon. But many investment opportunities nevertheless are still to be found in the country.
Bourke says those investment opportunities still apply, despite events in China. “As long-term investors, our outlook remains unchanged, particularly given the speed of events in China,” he says. Ultimately, there is still investment life in China. Investors should take note.
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